Corporate Income tax : Tax deduction
Section 65 ter (6) of the Revenue Code provides that penalties, criminal fines and surcharges are disallowable expenses in the determination of taxable net profits. However, following the Board of Taxation’s Ruling No. 10/2528, it was confirmed that the disallowance under Section 65 ter (6) only applies to penalties, criminal fines and surcharges imposed under the Revenue Code.
In 2005, the Revenue Department disallowed the deduction of penalties paid by a company to the Customs Department. The penalties imposed by the Customs Department are not governed by the Revenue Code. The dispute was then brought to the Central Tax Court. On 31 March 2011, the court held that the penalties were not deductible under Section 65 ter (6), regardless of the Board of Taxation’s Ruling No. 10/2528.
The case was subsequently heard by the Supreme Court (No. 1109/2559) on 26 February 2016 which upheld the Central Tax Court’s view that the penalties are not deductible for income tax purposes. The Supreme Court further held that the non-deductibility of these expenses is not due to Section 65 ter (6), but that the penalties were expenses not exclusively incurred for the purpose of acquiring profits or for the purpose of the taxpayer’s business and were therefore disallowed under Section 65 ter (13) of the Revenue Code. The Supreme Court’s view was based on the premise that the payment of the penalties were to release the company from liabilities derived from previous illegal actions.
Following these cases, the Thai Revenue Department requested the Board of Taxation to reconsider the Board of Taxation Ruling No. 10/2528.
The Board of Taxation concluded that the purpose for imposing penalties, criminal fines and surcharges is to penalize the offender and if these payments are allowed as tax deduction, it could serve to reduce the severity of such penalties, fines and surcharges.
On 27 February 2017, the Board of Taxation repealed the Board of Taxation Ruling No. 10/2528 and issued a new Board of Taxation Ruling No. 40/2560. The new ruling confirms that Section 65 ter (6) of the Revenue Code shall apply to penalties, criminal fines and surcharges under all tax laws and for all types of taxes.
The ruling will be effective from the date after it is published in the Royal Gazette. The ruling was published in the Royal Gazette on 17 March 2017 and is therefore effective from 18 March 2017 onwards.
It is unclear whether penalties, criminal fines and surcharges that are paid before the date on which the ruling becomes effective, but which are only reflected in a tax return which is due after the ruling becomes effective, will be allowed as a deductible expense or not.
In our view it is interesting that the Supreme Court referred to Section 65 ter (13) of the Revenue Code to disallow the deduction of the penalty as opposed to merely relying on Section 65 ter (6). This illustrates that the ambit of Section 65 ter (13) is interpreted on a broad basis and taxpayers should be cognisant of this.
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